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The Securities and Futures Commission (SFC)
commenced proceedings in the Market Misconduct Tribunal (MMT) in early March 2016
against Mayer Holdings Limited (Mayer), a company listed on the Main Board of the
Hong Kong Stock Exchange and its 10 current and former senior executives for breach
of the statutory obligation to disclose inside information as soon as reasonably practicable
under Part XIVA of the Securities and Futures Ordinance (SFO). This is the second
set of MMT proceedings brought against listed companies and their officers for breach
of the statutory corporate disclosure obligation since the statutory disclosure regime
came into force on 1 January 2013.

Background Facts

Between April and August 2012, while auditing Mayer’s financial statements for the
year ended 31 December 2011, the then auditors of Mayer repeatedly communicated with
Mayer’s management about issues they identified (collectively, outstanding audit issues)
including:

the suspicious nature of the disposal of a wholly-owned subsidiary of Mayer, for
HK$15.5 million;

Mayer did not control projects in Vietnam, which it bought for HK$620 million, and
their valuations appeared to have been inflated; and

two subsidiaries of Mayer’s jointly controlled entity had made substantial prepayments
of US$10 million and US$4 million respectively without security to suppliers which
appeared to be irrecoverable.

On 23 August 2012, Mayer’s then auditors indicated that they would qualify their audit
opinion for the financial statements for the year ended 31 December 2011 if the outstanding
audit issues were not resolved (potential qualified audit report).

On 27 December 2012, Mayer received a resignation letter from its then auditors.

Mayer published an announcement disclosing the auditors’ resignation together with
brief details of the outstanding audit issues on 23 January 2013.

SFC’s Allegations

The SFC identified the following three categories of “inside information”:

the auditors’ resignation;

the outstanding audit issues together with the potential qualified audit report;
and

the US$10 million prepayment to the supplier.

The SFC alleges that Mayer failed to disclose such inside information to the public
as soon as reasonably practicable after the information had come to its knowledge
and that its 10 current and former senior executives (including a company secretary
and financial controller and members of the board of directors), as officers of Mayer,
failed to ensure Mayer complied with its disclosure obligations.

First MMT Proceedings

The first MMT proceeding over late disclosure of inside information under the statutory
disclosure regime was brought against AcrossAsia Limited (AcrossAsia), its chairman
and its chief executive officer in July 2015. In that case, the chairman and the chief
executive officer received copies of court documents initiating insolvency-related
proceedings in Indonesia against AcrossAsia, along with their English translations,
by 4 January 2013, but such information was not announced to the public until 17 January
(being two days after the Indonesian court made insolvency-related orders against
AcrossAsia). The SFC alleged that the insolvency-related proceedings constitute inside
information because they threatened AcrossAsia with loss of control of its major asset
and could lead to the company being put into liquidation. The substantive hearing
of the proceedings against AcrossAsia, its chairman and its chief executive officer
is scheduled to be held from 31 October to 18 November 2016.

Reminder of Timely Disclosure of Inside Information

The two MMT proceedings indicate that delayed disclosure may result in enforcement
actions being taken by the SFC against the listed companies as well as their senior
management whose intentional, reckless or negligent conduct has resulted in the listed
companies’ breach of the disclosure requirement under Part XIVA of the SFO. It is
vital for listed companies’
senior management to be aware of their responsibility to ensure the listed companies
comply with their obligations to disclose inside information to the public as soon
as reasonably practicable after the information had come to their knowledge.

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